UK Ministry Proposes Expanding Director Liability.

As part of its scheme to improve corporate transparency and director accountability, a UK government ministry has proposed what UK Business Secretary Vince Cable calls “tough measures” to “give the public greater confidence that irresponsible directors will face consequences for their actions.” These proposals, if adopted, could significantly increase UK corporate directors’ liability exposures in the bankruptcy context. The increased exposures could have significant D&O insurance implications.

As discussed in the ministry’s July 15, 2013 press release (here), the UK Department of Business Innovation & Skills has released a discussion paper entitled “Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business” (here). The paper’s proposals are intended to address commitments the government made at the June 2013 G8 summit. The discussion paper has been released to solicit public comment. The discussion period ends September 20, 2013.

According to the ministry’s press release, the paper’s proposals are “aimed at addressing opaque company ownership structures and improving the accountability of the company directors.” The paper’s first part looks at ways to “inject greater transparency around who really owns and controls companies in the UK.” The paper proposes a number of measures to improve corporate transparency, including requiring companies to obtain and hold information on who owns and controls them, and prohibiting bearer shares. It is hoped that these and other measures would “help to tackle tax evasion, money laundering and the financing of terrorism, and improve the investment climate in the UK.”

The paper’s second section “sets out ways of making directors more accountable for misconduct or company failure” by, among other things, giving regulators greater power to disqualify directors, expanding the factors courts can take into account when disqualifying directors, and extending the time limits for the government to bring a disqualification proceedings in cases involving insolvent companies from the current two years to five years.

The paper also presents a proposal to give courts the power to hold directors personally liable to creditors if a director is disqualified by misconduct in connection with a company’s insolvency. The paper notes that “a complaint frequently heard from creditors is that although disqualification can prevent a director acting as such in the future, it provides no compensation to those who have suffered from their misconduct.” After noting that other jurisdictions allow creditors to pursue claims against directors in insolvency proceedings, the paper proposes giving courts powers to make compensatory awards at the time they make a disqualification order.

It is hoped that this measure would ‘improve confidence in the insolvency regime.” The aim would be “to increase the likelihood of culpable directors being called to account for their actions whilst providing better recourse to funds for creditors who have suffered. “ The paper also proposes giving liquidators the statutory right to sell or assign fraudulent and wrongful trading actions.

These measures are at this point merely proposals and they may not ultimately be implemented. However, according to a July 18, 2013 memo from the Clifford Chance law firm (here), if the measures are implemented, they would “add significantly to the circumstances in which directors might find themselves personally liable if a company fails.”

The law firm memo also points out that one concern arising from these proposals is the question whether “this new potential liability for creditors’ losses is likely to be covered” by D&O insurance. As the memo points out, insolvency is one of the important contexts in which a D&O policy is intended to provide protection. But though the directors should expect that the company’s D&O policy would protect them if they are the target of a claim to compensate creditors, there are “potential pitfalls.”

The new form of proposed liability would arise in a disqualification proceeding after the company has failed. The law firm memo notes that a failed company is unlikely to have a D&O insurance policy still in place by the time the liability action is asserted. Before a company fails and while D&O insurance is still in place, a director might try to take advantage of policy provision allowing notice of circumstances that may give rise to a claim, by notifying the insurer of the passivity of a creditor compensation claim. However, before the company has failed, the possibility of a later compensation claim “remains only a remote – and speculative – possibility” that may not be sufficient to support a notice of circumstances. This problem would be “exacerbated” if the government extends the time within which disqualification proceedings may be brought from the current two to five years.

Some companies facing bankruptcy may procure a run-off policy, to provide insurance protection for claims arising from pre-bankruptcy conduct. The law firm memo notes an interesting pitfall that I suspect may be unique to UK policies. The memo states that “directors that have been disqualified are typically excluded,” and adds that “run-off cover does not extend to directors who have been disqualified from acting as directors.” Perhaps a reader from the UK can educate me on this provision, as I am not familiar with D&O policy provisions expressly precluding coverage for disqualified directors.

But as the law firm memo points out, as a result of these provisions precluding coverage for disqualified directors, the directors “may find that they are unable to avail themselves of the run-off cover in the very situation in which they need it (although up to the date that the director is disqualified the run-off cover may at least cover the costs of defending a creditor compensation claim).”

It will be very interesting to see whether the proposed new director liability provisions are implemented. As the law firm memo concludes, “directors concerned about the Government’s proposals to expand their personal liabilities would be well advised t review their D&O policy wordings carefully or face the risk of having to bear substantial compensatory awards themselves if the new proposals come into effect.”

D&O Insurance in India: While I am on the topic of D&O exposures and insurance outside the U.S. I thought I should also briefly note the July 18, 2013 article in The Times of India entitled “Lawsuits Make Companies Go for CEO-Director Cover” (here) which reports that more Indian companies are expressing interest in D&O insurance. The article notes that until recently D&O insurance was viewed in India as “an exotic cover,” most of interest to Indian companies with U.S. listings.

Now, according to the article, D&O insurance is drawing interest from many mid-to-large size companies. The increase in interest follows “a spate of high profile cases such as iGate and Satyam,” as well as activates of foreign institutional investors. For example, the Children’s Institutional Fund threated to sue independent directors of Coal India for not protecting shareholders interests. The article also notes that regulatory actions and employment practices activities also have been the source of many claims notifications.

The article reports that D&O insurance remains relatively inexpensive in India. According to the article, “companies can even now get cover for up to $1 million for equivalent of $1,000.”

Midnight in Yoknapatawpha County: On November 18, 2013, in an entertaining opinion written in connection with a really dumb lawsuit, Northern District of Mississippi Chief Judge Michael P. Mills rejected the claims asserted by the holders of William Faulkner’s literary rights that the makers of the Woody Allen movie Midnight in Paris had infringed the Faulkner copyright when they quoted a line in the movie from Faulkner’s novel Requiem for a Nun. A copy of Judge Mills’s opinion can be found here.

The dispute centers on a quote of a statement by a character in the novel that “The past is never dead. It’s not even the past.” The literary rights holders contended that the moviemakers infringed the Lanham Act and the Copyright Act with a line in the movie in which one character says “The past is not dead. Actually, it’s not even past. You know who said that? Faulkner, and he was right. I met him too. I ran into him at a dinner party.”

The opinion opens with admirably succinct plot synopses of the movie and of the book. In a footnote after the synopses, Judge Mills disagrees with the defendants’ characterization of the novel as “relatively obscure, “noting that “nothing in the Yoknapatawpha canon is obscure. Having viewed the two works at issue in this case, the court is convinced that one is timeless, the other temporal.”

After a lengthy analysis, Judge Mills rejected the plaintiffs’ copyright claim, holding that no substantial similarity exists between the copyrighted work and the allegedly infringing work and that the movie’s use was de minimis. He also rejected the plaintiffs’ Lanham Act claim, noting that the movie’s brief literary allusion cannot “possibly be said to confuse an audience as to an affiliation between Faulkner and Sony. Allusion is not synonymous with affiliation, nor with appropriation.”

Though the case required Judge Mils to compare Midnight in Paris to Requiem for a Nun, he expressed his gratitude that “the parties did not ask the court to compare The Sound and the Fury with Sharknado.”

Just in case the holders of Faulkner’s literary rights should read this blog post, let me emphasize to readers that my quotation of language above from Requiem for a Nun should not in any way be interpreted as representing an affiliation between Faulkner and his works and this blog, nor should the quotation be interpreted as a form of an endorsement.

Special thanks to a loyal reader for sending me a copy of the opinion.

They Return With All Sorts of Wild Ideas: In a July 6, 2013 Economist magazine article discussing how students returning to China from studies in the West are now finding it harder to find employment, the article suggests a number of possible reasons. The article suggest that they are finding the Chinese labor market so challenging because there is a glut of so-called “sea turtles” returning and also because the local schools are now turning out more qualified graduates who are better matched to Chinese employers’ current needs.

The article also quotes an unnamed investment banker who suggests another reason that many Chinese employers are reluctant to employ the returning students, which is that the returning students “often cling to quaint Western notions like transparency, meritocracy and ethics, which puts them at a disadvantage in China’s hyper-Darwinian economy, where locals are more willing to do whatever the boss or client wants.”

Summer’s Here and the Time is Right for Dancing in the Street: In his July 20, 2013 Wall Street Journalbook review, David Kirby relates the account in Mark Kurlansky’s new bookReady for a Brand New Beat of how in July 1964 Martha Reeves came to record the song “Dancing in the Street.” She had arrived at the Motown Studios as then rising-star Marvin Gaye had begun work on the song, which had been set up for a male vocalist. On the spur of the moment, Gaye suggested that the 21 year-old Reeves give the song a try. She nailed the song on her first attempt – but Gaye had neglected to engage the recording machine. Frustrated to have to sing it again, Reeve’s second take – the one that became one of Motown’s iconic songs – carried just a note of aggression. According to Kurlansky, the song went on to be a rallying cry for social upheaval during the 60’s.

It doesn’t matter what you wear, just as long as you are there. Here’s a classic video of Reeves performing “Dancing in the Street,” to get your feet tapping on a Monday morning. (Sorry about the advertisement at the beginning; it is short).

Disclaimer

The views expressed on this site are exclusively those of the author, and all of the content on this site has been created solely in the author's individual capacity. This site is not affiliated with his company, his colleagues, his clients, his relatives or any other institution or person living, dead, or yet to exist. Quotations from this site should credit The D & O Diary. However, this site may not be quoted in any legal brief or any other document to be filed with any Court unless the author has given his written consent in advance. This blog does not intend to provide legal advice. You should consult your own attorney in connection with matters affecting your own legal interests.